Feb. 19 (Bloomberg) -- Exchanges and clearing firms would
have to routinely test their technology for stability and
security under a rule being drafted by the U.S. Securities and
Exchange Commission.

SEC Chairman Elisse B. Walter told an audience at American
University’s Washington College of Law today that the agency has
accelerated a proposal for a mandatory technology-review
program. It would require market participants, including
exchanges, clearing firms and other trading platforms, to test
how their systems respond to outages and notify the agency about
any disruptions.

The rule would convert a voluntary program, known as
Automation Review Policy, that was created after the Oct. 16,
1987, market crash known as “Black Monday.” Under that
program, exchanges voluntarily follow SEC guidance and submit to
periodic SEC inspections of their systems.

“A voluntary standard is no substitute for a mandate and a
requirement that you must follow,” Walter told reporters after
the speech. She declined to say when the SEC might release a
rule proposal for public comment.

Walter’s speech surveyed the SEC’s efforts to improve its
technology in an era of high-frequency traders and electronic
market makers. The commission’s Midas database and planned
consolidated audit trail are key to that effort, she said.

Complex Plumbing

The consolidated audit trail will trace how orders are
routed through the equity market’s complex plumbing. Midas will
allow the commission to view all orders, order cancellations and
trade executions on U.S. exchanges.

While the SEC has said the Midas data will help it
reconstruct the causes of market crashes, Walter said today that
it could also inform how new regulations are written.

SEC staff will likely use Midas to analyze the practice of
offering quotes and then quickly canceling them. The exercise
could provide a “clearer picture” about the impact of a
potential rule requiring high-frequency traders to maintain a
quote to buy or sell a security for a minimum amount of time,
she said.

The commission is considering publicly releasing the
studies it performs using Midas data, Walter said.

“Whatever the data reveals, the SEC will have a
substantially deeper understanding of where and how we should
and can act to make the markets more stable for investors,” she
said during the speech.

The agency also is developing models to identify suspicious
financial results in routine public filings. In addition, a new
tool will electronically scope public companies’ written
disclosures for irregularities, Walter said.

“Through this model we hope to be able to more quickly
identify ‘earnings management’ -– which is a nice way of saying
manipulative or even fraudulent accounting practices,” she
said.